Strengths and Weaknesses of Southwest Airlines.
Southwest Airlines is a leading US-based airline company with operations across 40 US states and some international destinations. In 2018, it was the largest domestic carrier in the United States with the highest number of enplaned passengers. Southwest carried more than 163.6 passengers in 2018. Southwest unlike the other leading carriers in the United States which follow a hub and spoke model including its leading competitor Delta Airlines follows a point to point service model. Apart from customer service, Southwest Airlines is known for its price leadership.
The company focuses on operational efficiency to reduce operational costs. It uses only Boeing 737 aircraft in its fleet to keep the fuel prices and overall operational costs under control. There are 750 Boeing 737 aircraft in the fleet of Southwest Airlines. However, despite the competitive pressure and regulatory troubles, Southwest is enjoying profitable growth. Its net revenue in 2018 reached $21.97 billion.
Read a SWOT analysis of Southwest Airlines to understand its competitive position in the US aviation industry as well as learn of its major strengths, weaknesses and leading challenges.
|Company Name||Southwest Airlines Co.|
|Industry||US Airline Industry|
|Net Revenue (2018)||$21,965 million|
|Net Income (2018)||$2,465 million|
|Fleet Size||750 aircraft.|
|Passengers carried (2018)||163.6 million|
|Leading competitors||Delta, American, United, Jetblue, Skywest, Alaska, Spirit, Frontier, Republic.|
Leading Position in the US aviation industry: –
Southwest Airlines is the leading domestic carrier of the United States with flight operations across 40 US states serving 99 destinations. However, in recent years the company has also focused upon expanding its flight network internationally and is serving destinations across 10 more countries. It is the largest domestic carrier based in the United States. In 2018, Southwest carried more than 163 million passengers which was the highest number of all the airline services based in the United States. In the continental United States, the route network of Southwest Airlines is among the strongest. Here, Southwest serves 84 cities which represent 95% of its available seat miles. Based upon its stellar performance in 2018, Fitch ratings moved the ratings of Southwest Airlines to A- from BBB+ in early 2019 based upon its low credit risk level.
Large and efficient fleet:-
One of the main reasons behind the strong position of Southwest airlines in the aviation industry is its price leadership. However, to maintain the price advantage, the company has to focus heavily upon keeping operational costs under control which depends to a large extent on the efficiency of its fleet. Jet fuel prices have continued to rise year after year. Southwest Airlines uses only Boeing 737 aircraft in its fleet because of its fuel efficiency. There are 750 Boeing 737 aircraft in the fleet of Southwest Airlines of which the company owns 627 and 123 were leased. There are 512 Boeing 737-700 aircraft in the fleet of Southwest Airlines. To grow its fuel efficiency, the company also focuses on fleet modernization. It previously retired all Boeing 737-300 models from its fleet to include more fuel-efficient versions of Boeing 737.
Apart from a large and fuel-efficient fleet of aircraft, the company also focuses on other areas to maintain operational efficiency. Its operational model is different from the one used by most other airlines in the US. While other airlines mostly use the hub and spoke model of operations, Southwest Airlines uses a point to point service model. In 2018, apart from achieving 1.5 percent higher fuel efficiency, Southwest airlines also achieved improved on-time performance. The company is also focusing upon adding depth to schedule offerings in certain important destinations which will benefit operational efficiency and offer the customers extra options to reach their final destinations.
Southwest follows the point to point route structure instead of the hub and spoke model. This route structure allows for more direct nonstop routing compared to the hub and spoke model. It has also allowed the company to provide its markets with frequent, conveniently timed flights and low fares. In the last few years, the company also enjoyed a lot of improvement in the area of customer service and baggage handling due to higher operational efficiency and hospitality of its staff.
Lower Prices :-
The price leadership of Southwest Airlines is an important source of competitive advantage for it. Even if it puts some strain on profit margins and operating costs, the large number of loyal customers more than makes up for all the efforts the company makes to keep fares low. Apart from keeping fares low, the company does not charge unexpected bag fees, change fees or any other hidden fees either. Moreover, it does not charge additional fees for items such as seat selection, snacks, curbside check-in, and telephone reservations. It is the only major US airline that allows its passengers to carry two checked bags (within weight and size limits).
Price leadership is a core component of the company’s business strategy. Southwest focuses on cost discipline and charges competitively low fares. The point to point route structure allows for simplified operations. Moreover, in order to reduce costs, the company focuses on reducing fuel consumption and enhancing fuel efficiency. Fuel and oil expenses are its second-largest operating expenses. However, the company uses only Boeing 737 jets in its fleet which also allows it to control costs and pass on the benefits to the passengers.
Focus on Customer Service:-
Southwest Airlines has remained committed to customer service and during fiscal 2018 and 19, it achieved some major improvement in this area. For several years consistently, the company has remained among the top in terms of customer satisfaction and lower customer complaint ratio. According to the 2018 annual report of Southwest, from 2017 to 2018, customer complaints were down 19 percent. The company is continuously improving its image by focusing on operational reliability and customer service.
Healthy Profit margins:
Southwest Airlines is not just the largest Airlines in the United States but also the one with the healthiest profit margins. Despite keeping prices low the company has continued to enjoy strong profit margins which means it is already the winner in case of a price war. Southwest and Delta are the two airline companies in the United States that enjoy the best profit margins in the entire industry. 2018 was the 46th consecutive year of profitability for Southwest with strong profit margins and record cash flows.
Limited International operations:-
Southwest Airlines is mainly a domestic carrier offering flights to 40 US states. It offers its flights to a limited number of international destinations. The only international destinations that Southwest serves include Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. These are just a handful of destinations compared to Delta Airlines. Delta, which is a leading competitor of Southwest Airlines serves more than 300 destinations across 50 countries. The American Airlines group which is another leading competitor of Southwest also serves more than 350 destinations across 50 countries. So, compared to the leading competitors of the company, Southwest has a limited international network. It is still mainly a domestic carrier and while the company is working to expand internationally, it is still a lot behind its rivals.
Operational costs affecting net income
The company has been able to capture a larger market share than its rivals by lowering costs. However, it has to focus a lot on reducing expenses by improving fuel efficiency and other areas where costs can be lowered. In 2018, the operating expenses of Southwest Airlines grew compared to last year. Operating expenses of the company have kept rising year on year and in 2018 they reached $18.76 billion from $17.74 billion in 2017. The net income of the company came down to $2.47 billion in 2018 from $3.36 billion in 2017. In 2018, the operational expenses of Southwest Airlines grew mainly driven by higher jet fuel prices. However, higher operating expenses also mean lower net income.
Strong air travel demand : –
In 2018, the US economy was in a solid position with a strong growth rate and lower unemployment. This led to growth in the demand for air travel. The performance of the company was also stellar riding upon higher demand. Southwest has focused on better customer service and operational reliability to improve its market share. In 2020, the airline industry is expected to see higher profits according to an IATA forecast with the North American region leading the way. This is an important opportunity for airline companies based in North America and particularly the United States.
Expanding its route network internationally and flying to the leading developed markets in Europe could also help Southwest Airlines find faster growth in terms of market share and revenue. The rivals of Southwest like Delta and American serve many more international locations compared to Southwest and the company should try to accelerate its international expansion plan.
Partnership with international Brands:-
Forming partnerships and alliances with other leading international carriers can also be profitable for the company allowing it to improve its market share and revenue faster. Such alliance partnerships will help the company cover new routes and serve various new segments of customers which could help Southwest strengthen its bottom line. Its rival Delta Airlines which flies to a large number of international destinations has formed joint ventures with several international brands. Southwest can also form such joint ventures to find faster growth.
Diversifying into related services:
Diversifying into related areas could also help the company expand its market share as well as grow new sources of revenue. The airline industry is a very large industry. Commercial airlines alone generated around $838 billion in revenue in 2019. There are several related services also which can help Southwest Airlines generate higher revenue.
There is intense competition in the US airline industry and apart from prices, companies also compete on the basis of operational reliability as well as customer service. However, there are several leading US-based airlines that compete with Southwest airlines including Delta, American, Alaska, and Jetblue. With higher competition, the operating costs of the companies have also grown higher as they have to invest more in marketing, customer service, and other areas.
Growing operational costs:-
The operating expenses of Southwest Airlines have kept growing year on year. In 2018, the operating expenses of Southwest airlines grew mainly driven by the rising costs of jet fuel. The operating expenses of the company rose by 5.8% compared to the previous year. Operating expenses rise to $18.8 billion and net income was lower than the previous year. Higher operating expenses can lead to reduced net income for the company.
Regulatory pressures and taxes:-
While on the one hand, the US airline industry is marked by heavy competition, on the other there are regulatory and tax burdens which are a major hurdle to fast and profitable growth for airline companies. Apart from aggressive regulation by the DOT, the tax burden on this industry is also higher compared to several other industries. All of these factors lead to higher operating expenses and reduced profit margins.
While Southwest has continued to manage a strong image and improve its customer service year by year, legal issues in the airline industry can be a cause of major losses for any airline business. Legal problems also cause operational disruptions and other problems which can cause loss of revenue. In 2019, a legal tussle with its mechanic’s union caused the company a lot of loss in operating revenue.
Southwest Airlines is not just the leading domestic carrier in the US market, it is also the one with the strongest market position there. However, there are several challenges to profitable operations in the US airline industry. Despite that, the overall performance of Southwest Airlines has continued to improve. Not just the financial performance of Southwest but its operational efficiency has also improved a lot in the past few years. The company has strong free cash flows which means it can invest more than its rivals in expansion and growth. However, the international network of Southwest airlines is much limited compared to its leading rivals. To find faster growth the company should invest in international expansion. Forming joint ventures with other leading international airlines can also help it expand its market share and generate extra revenue. In the coming years, the US-based airlines are expected to enjoy profitable growth. It is true that there are several challenges apart from intense competition in the airline industry and still there are several major opportunities before Southwest which can help it find more profitable growth.
Pratap, A. (2020, January 8). SOUTHWEST AIRLINES SWOT ANALYSIS . In Notesmatic. Retrieved from https://notesmatic.com/2020/01/southwest-airlines-swot-analysis/
Pratap, Abhijeet. “SOUTHWEST AIRLINES SWOT ANALYSIS .” Notesmatic, 8 Jan. 2020, notesmatic.com/2020/01/southwest-airlines-swot-analysis/.